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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 7, 2002 Decided February 7, 2003

No. 01-5295

COMMUNITY CARE FOUNDATION,

F/K/A NORTHWEST MEDICAL SYSTEM, INC.,

D/B/A NORTHWEST MEDICAL CENTER,

APPELLEE

v.

TOMMY G. THOMPSON, SECRETARY OF THE

UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,

APPELLANT

Appeal from the United States District Court

for the District of Columbia

(No. 99cv02947)

Richard A. Olderman, Attorney, U.S. Department of Justice, argued the cause for appellant. With him on the briefs

were Roscoe C. Howard, Jr., U.S. Attorney, and Barbara C.

Biddle, Assistant Director, U.S. Department of Justice.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.
2

Dan M. Peterson argued the cause and filed the brief for

appellee.

Before: SENTELLE, ROGERS and GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: This is an appeal from the district court’s ruling which reversed a decision of the Secretary

of Health and Human Services (‘‘HHS’’) that denied pass

through treatment for certain costs incurred by a provider

during its participation in a nursing education program.

Community Care Found. v. Thompson, No. 99CV02947

(D.D.C. June 18, 2001). Finding the rule relied upon by the

Secretary to be a reasonable interpretation of an ambiguous

statute and the present application of that rule supported by

substantial evidence, we reverse.

I

The Medicare program provides federally funded health

insurance for the aging and the disabled. 42 U.S.C. § 1395 et

seq. (1992 & West Supp. 2002). Medicare is administered by

the Centers for Medicare and Medicaid Services, formerly the

Health Care Financing Administration (‘‘HCFA’’) of HHS.

Part A of Medicare authorizes payment for covered care at

hospitals and other specified institutions. 42 U.S.C. § 1395c–

1395i–5. Part A services are furnished by ‘‘providers’’ who

have entered into agreements with the Secretary of HHS. 42

U.S.C. §§ 1395x(u), 1395cc. In order to receive payments

from HHS, providers must comply with the provider agreement and with all relevant Medicare statutes and regulations.

42 U.S.C. § 1395cc(b)(2).

Medicare payments to a provider are based on a ‘‘cost

report’’ submitted by the provider at the close of each fiscal

year. 42 C.F.R. § 413.20(b) (2001). A cost report is filed

with a fiscal intermediary (‘‘FI’’), which is usually an insurance company such as Blue Cross Blue Shield, designated by

the Secretary of HHS. 42 U.S.C. § 1395h; 42 C.F.R.

§ 413.20(d). The FI analyzes the report and issues a written

‘‘notice of amount of program reimbursement’’ (‘‘NPR’’). If
3

the provider is dissatisfied with the FI’s determination, the

provider may appeal to the Provider Reimbursement Review

Board (‘‘PRR Board’’). 42 U.S.C. § 1395oo(a)(3); 42 C.F.R.

§ 405.1835 (2001). The PRR Board’s decision may be reviewed by the Secretary’s delegate, in this case the Administrator of the HCFA. The HCFA may affirm, reverse, modify, or remand a PRR Board decision. 42 C.F.R. § 405.1875.

This result is subject to judicial review. 42 U.S.C.

§ 1395oo(f)(1).

From 1966 until 1983, Medicare reimbursed health care

providers based upon the ‘‘reasonable costs’’ of inpatient

services furnished to Medicare patients. 42 U.S.C.

§ 1395f(b). Under this regime, providers were reimbursed

for the actual costs they incurred, provided they fell within

certain cost limits. 42 U.S.C. § 1395x(v)(1)(A). As hospital

costs increased, so did Medicare reimbursements.

In 1983, in an effort to curtail escalating Medicare expenditures, Congress revised the reimbursement scheme. Congress adopted the Prospective Payment System (‘‘PPS’’),

which relies upon prospectively fixed rates (based upon geographic location and diagnosis) for each category of treatment

rendered. 42 U.S.C. § 1395ww. PPS was more restrictive

than the reasonable cost system.

Since the first Medicare regulations were issued in 1966,

the Secretary has permitted reimbursement for the costs of

‘‘approved educational activities.’’ 20 C.F.R. § 405.421 (1967),

later redesignated as 42 C.F.R. § 405.421 (1977), and then as

42 C.F.R. § 413.85 (1986). By regulation, the Secretary has

defined ‘‘approved educational activities’’ as ‘‘formally organized or planned programs of study usually engaged in by

providers in order to enhance the quality of patient care.’’ 42

C.F.R. § 413.85(c) (2001). This regulation, ever since its

origination, has expressed that the costs of educational activities should be borne by the community, but until communities

would undertake to bear these costs, the Medicare program

would share appropriately in the support. See 66 Fed. Reg.

3359 (Jan. 12, 2001). The regulation has also stated that it

was not intended that Medicare pay for increased costs
4

resulting from a redistribution of costs from educational

institutions to providers. Id.

In the early 1970s, the HCFA found that the Medicare

program’s liability for the costs of educational programs had

expanded to include the costs of some programs that were

actually run by universities with some support by providers.

The HCFA believed that these programs should not be

subsidized by Medicare. Accordingly, in 1975, the HCFA

adopted a standard that required that the provider be the

‘‘legal operator’’ of the education program in order to obtain

reimbursement for its associated costs. The HCFA modified

this standard following some adverse rulings, including a 1979

Seventh Circuit case which held that 42 C.F.R. § 405.421

does not require that a provider be the ‘‘legal operator’’ of an

educational program in order to qualify for reimbursement.

St. John’s Hickey Mem. Hosp., Inc. v. Califano, 599 F.2d 803

(7th Cir. 1979).

Following the Congressional adoption of PPS in 1983, the

Secretary once again issued new regulations. Although PPS

was stricter that the reasonable cost system that preceded it,

Congress retained the more lenient reasonable cost system

for ‘‘approved educational activities.’’ 42 U.S.C.

§ 1395ww(a)(4). The costs of approved educational activities

‘‘pass through’’ PPS and are reimbursed under the reasonable

cost system. 42 U.S.C. § 1395ww(a)(4), (d). The new regulations that implemented PPS prohibited pass through treatment for ‘‘[c]linical training of students not enrolled in an

approved education program operated by the provider’’ and

‘‘activities that do not involve the actual operation of an

approved education program.’’ 42 C.F.R. § 413.85(d)(6), (7).

As early as 1984, the Secretary had stated that ‘‘only the

costs of those approved medical education programs operated

directly by a hospital be excluded from [PPS].’’ Medicare

Program; Prospective Payment for Medicare Inpatient Hospital Services, 49 Fed. Reg. 234, 267 (Jan. 3, 1984) (preamble

to rule) (emphasis added). The Secretary continued on in the

preamble:
5

If a program is operated by another institution, TTT [it]

must be noted that by far the majority of the costs of

that program are borne by that other institution, and not

by the hospital. While it is true that the hospital may

incur some costs associated with its provision of clinical

training to students enrolled in a nearby institution, the

hospital also gains in return. For example, it obtains the

services of the trainee TTT We do not believe that this

type of relationship was what Congress intended when it

provided for a pass through of the costs of approved

medical education programs. Rather, we believe that

Congress was concerned with those programs that a

hospital operates itself, and for which it incurs substantial direct costsTTTT We are revising 405.421(d)(6) [now

413.85(d)(6)] to clarify that the costs of clinical training

for students enrolled in programs, other than at the

hospital, are normal operating costs.

Medicare Program; Prospective Payment for Medicare Inpatient Hospital Services, 49 Fed. Reg. at 267.

In 1989 and 1990, Congress passed legislation (the Omnibus

Budget Reconciliation Act of 1989, Pub. L. No. 101–239, 103

Stat. 2106 (1989) (‘‘OBRA 89’’) and the Omnibus Budget

Reconciliation Act of 1990, Pub. L. No. 101–508, 104 Stat.

1388 (1990) (‘‘OBRA 90’’)) relating to the reimbursement of

costs associated with nursing education programs. Section

6205 of OBRA 89, Pub. L. No. 101–239, created a temporary

category of hospital-based nursing schools in addition to those

already recognized under 42 C.F.R. § 413.85. It permitted

reimbursement of a hospital’s reasonable costs of training

students in a hospital-based nursing school ‘‘if, before June

15, 1989, and thereafter, the hospital demonstrates that for

each year, it incurs at least 50 percent of the costs of training

nursing students at such school, the nursing school and

hospital share some common board members, and all instruction is provided at the hospital, or if in another building, a

building on the immediate grounds of the hospital.’’ 42

U.S.C. § 1395x note (Recognition of Costs of Certain

Hospital–Based Nursing Schools). Section 4004(b) of OBRA

90 allows reasonable cost reimbursement of the clinical train-
6

ing costs associated with nursing and allied health education

programs not operated by a hospital upon certain conditions.

42 U.S.C. § 1395ww note (Payments for Medical Education

Costs).

Appellee Community Care Foundation (‘‘Northwest’’), formerly Northwest Medical Systems, Inc., owns and operates

Northwest Medical Center, an acute care hospital in Springdale, Arkansas. Baptist Medical Systems, Inc. (‘‘BMS’’) is an

Arkansas non-profit corporation. During the relevant time

period, BMS operated the Baptist Medical Systems School of

Nursing (‘‘BMSSN’’) at the Baptist Medical Center in Little

Rock, Arkansas.

On May 14, 1990, Northwest and Washington Regional

Medical Center (‘‘WRMC’’) entered into an agreement with

BMS to operate a nursing education program to benefit both

Northwest and WRMC. This agreement provided that BMS

would extend its nursing program by establishing a nursing

school at a facility provided by Northwest and WRMC. The

new school would be known as BMSSN–Northwest. Northwest and WRMC agreed to provide the site, equipment,

furnishings, and liability insurance, and to reimburse BMSSN

for all direct expenses that exceeded collections for tuition,

fees, and books. The agreement also provided that:

BMSSN shall have full and complete ownership of the

school, as well as full and complete charge of the administration, management and operation of BMSSN–Northwest. BMSSN shall also have the exclusive right to

determine and make all fiscal, technical and professional

policies relating thereto including, but not limited to, the

educational curriculum and the recruitment, selection,

and termination of faculty, staff and students TTT Curriculum content, classroom instruction, and clinical laboratory instruction shall be determined by BMSSN in its sole

discretion.

Agreement at 2–4.

The agreement set out BMSSN’s role as one of an ‘‘independent contractor.’’ Id. at 6. Northwest and WRMC gen-
7

erally were not permitted to ‘‘have [ ]or exercise any control

over the professional judgment or methods used by BMSSN

in the performance of services’’ under the agreement. Id. at

6.

In its cost report for the fiscal year ending in June of 1991,

Northwest included $198,409 for costs relating to the

BMSSN–Northwest nursing education program. Northwest

claimed these as pass through costs subject to the more

favorable reasonable cost reimbursement. The Medicare reimbursement impact of the classification of these costs was

estimated to be $89,045.

The FI, Blue Cross/Blue Shield of Arkansas (‘‘BCBS’’),

issued an NPR reclassifying Northwest’s costs related to

BMSSN–Northwest. BCBS determined that Northwest was

not actually operating BMSSN–Northwest. Recognizing that

only those education programs actually operated by the provider could receive pass through treatment, BCBS concluded

that Northwest’s claimed costs should be treated as normal

operating costs subject to PPS. Northwest appealed this

determination to the PRR Board.

The PRR Board reversed BCBS’ decision and concluded

that Northwest had engaged in the joint operation of the

nursing education program. Northwest Med. Ctr. v. Blue

Cross & Blue Shield Ass’n/Blue Cross & Blue Shield of Ark.,

PRRB Dec. No. 99–D55 (June 20, 1995). The PRR Board

found four factors ‘‘significantly noteworthy’’ to this conclusion: (1) Northwest’s nursing staff provided training and

supervision to the students; (2) the students interacted with

Northwest’s medical staff; (3) Northwest’s Director of Education served as liaison between BMSSN and Northwest; and

(4) instructors and students on the Northwest campus were

subject to Northwest’s policies relating to patient care and

safety. Id. at 11–12.

The PRR Board also found that BMS was itself a Medicare

provider. The PRR Board noted that BMS is a non-profit

that directly owns and leases hospital facilities in the Medicare program; that no separate corporation existed for

BMSSN; and that BMS holds the nursing school license from

the Arkansas State Board of Nursing. Id. at 11. The PRR
8

Board found that Northwest and BMS were providers jointly

operating the nursing education program, and that Northwest’s costs associated with the program should be given pass

through treatment and reimbursed on the reasonable cost

system. The HCFA appealed this decision to the HCFA

Administrator.

The Administrator reversed the PRR Board. Northwest

Med. Ctr. v. Blue Cross & Blue Shield of Ark., Review of

PRRB Dec. No. 99–D55 (HCFA 1999). The Administrator

concluded that Northwest ‘‘was not the operator of the program, nor the joint operator of the nursing program with

BMS/BMSSN as required by the PPS revised 42 CFR

413.85.’’ Id. at 10. The Administrator found that the four

factors cited by the PRR Board did not constitute ‘‘operation’’

of the program. Id. Instead, the Administrator focused on

the contractual nature of the arrangement, and decided that

Northwest ‘‘merely contracted for a service to be furnished

by BMS, the owner and operator of the nursing school.’’ Id.

Therefore, the Administrator found that 42 C.F.R.

§ 413.85(d)(6) barred reimbursement of Northwest’s costs of

participation in the nursing education program. The Administrator also ruled that BMS was not itself a provider. Rather, BMS ‘‘is a corporation which owns several facilities which,

in turn, have provider agreements with the Medicare program.’’ Id. at 10 n.22.

Northwest sought review of the Secretary’s decision in the

district court. (The Administrator’s decision constitutes the

final decision of the Secretary of HHS. Id. at 12.) The

district court reversed the Secretary’s decision. The district

court held that the Secretary’s decision to limit pass through

treatment to the costs of programs actually operated by the

provider was inconsistent with the intent of Congress and

unreasonable. The district court further found the Secretary’s decision unsupported by substantial evidence because

the Secretary focused on the contractual terms of the agreement among the parties without considering how the parties

acted in operating the program. The Secretary of HHS

appealed.
9

II

Section 1395ww(a)(4) of the Medicare statute excludes ‘‘approved educational activities’’ from the definition of ‘‘operating costs of inpatient hospital services,’’ which receive reimbursement according to PPS. 42 U.S.C. § 1395ww(a)(4).

The present case turns on the construction of the term

‘‘approved educational activities;’’ thus we turn to the familiar

two-step methodology of Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984).

In interpreting an agency’s enabling or organic statute, we

‘‘employ traditional tools of statutory construction’’ to determine ‘‘whether Congress has directly spoken to the precise

question at issue.’’ Chevron, 467 U.S. at 843 n.9, 842. We

‘‘must give effect to the unambiguously expressed intent of

Congress;’’ if the statute is unambiguous on the question at

issue, our inquiry ends there. Id. at 842–43 (Chevron step

one). Where ‘‘the statute is silent or ambiguous with respect

to the specific issue, the question for the court is whether the

agency’s answer is based upon a permissible construction of

the statute.’’ Id. at 843 (footnote omitted) (Chevron step

two). In addition, the ‘‘tremendous complexity’’ of the Medicare program enhances the deference due the Secretary’s

decision. Methodist Hosp. of Sacramento v. Shalala, 38 F.3d

1225, 1229 (D.C. Cir. 1994). The Supreme Court has stated

that the deference is ‘‘even more warranted’’ when the Secretary’s interpretation concerns such a ‘‘complex and highly

technical regulatory program.’’ Thomas Jefferson Univ. v.

Shalala, 512 U.S. 504, 512 (1994) (quotation omitted).

Congress did not define ‘‘approved educational activities,’’

leaving the definition of that term to the Secretary. Northwest contends otherwise, arguing that the legislative history

of the PPS legislation establishes that Congress intended to

incorporate into PPS the extant definition of ‘‘approved educational activities’’ created by earlier regulations and case

law. The legislative history that Northwest cites reads:

‘‘Medical education expenses, such as the salaries of interns

and residents under approved education programs (as defined

in current regulation, including nursing education programs),
10

would continue to be paid on the basis of reasonable cost.’’

H.R. Rep. No. 98–25 at 140 (1983), reprinted in 1983

U.S.C.C.A.N. 219, 359 (emphasis added). According to

Northwest, this single statement from a House Report signals

unambiguous Congressional intent to incorporate into the

PPS system the extant definition of approved educational

facilities. Northwest argues that this bit of legislative history

renders section 1395ww(a)(4) unambiguous. We disagree.

As Judge Leventhal observed, reviewing legislative history is

like ‘‘looking over a crowd and picking out your friends.’’

Wald, Some Observations on the Use of Legislative History

in the 1981 Supreme Court Term, 68 Iowa L. Rev. 195, 214

(1983). Here, Northwest’s review of the legislative history

has produced but one ‘‘friend.’’ This solitary statement from

a House Report is insufficient to render unambiguous the

undefined term ‘‘approved educational activities’’ in section

1395ww(a)(4). And so we move to step two of the Chevron

analysis.

Since shortly after the advent of the PPS system, the

Secretary has adopted a construction of section 1395ww(a)(4)

that defines ‘‘approved educational activities’’ – the ones that

receive the more favorable reasonable cost reimbursement –

as those medical education programs that are ‘‘operated

directly’’ by a hospital. Medicare Program; Prospective

Payment for Medicare Inpatient Hospital Services, 49 Fed.

Reg. at 267; Northwest Med. Ctr. v. Blue Cross & Blue

Shield of Ark., Review of PRRB Dec. No. 99–D55, at 10

(HCFA 1999). Northwest urges a construction of section

1395ww(a)(4) that would allow reasonable cost reimbursement

for those programs that further the Secretary’s stated purpose of prohibiting favorable treatment of costs redistributed

from a non-provider to a provider. Northwest argues that

the Secretary’s construction is unreasonable here because

there is no redistribution of costs in the present case. Even

assuming there is no redistribution of costs here, Northwest

overlooks another purpose underlying the Secretary’s rule.

The Secretary seeks to avoid granting favorable reimbursement to any program that ‘‘is operated by another institution’’

that bears ‘‘the majority of the costs of that program.’’
11

Medicare Program; Prospective Payment for Medicare Inpatient Hospital Services, 49 Fed. Reg. at 267. The Secretary

finds no reason to use federal taxpayer money to support a

program that already receives sufficient support from other

sources, especially where the provider receives some gain in

return for its contributions of resources to the program.

Next, Northwest suggests that the Secretary’s construction

argues that OBRA 89 and OBRA 90 significantly altered the

Secretary’s reimbursement scheme. This argument is a weak

one. OBRA 89 and OBRA 90 did not significantly alter the

reimbursement scheme; they merely set up limited exceptions where non-providers can be reimbursed subject to certain conditions. As Northwest’s arguments fail, we see that

the Secretary’s construction of section 1395ww(a)(4) is a

reasonable one. Hence, we defer to the Secretary’s construction.

Northwest further claims that the Secretary’s decision is

arbitrary and capricious because it is inconsistent with prior

decisions of the PRRB, St. Mary’s Med. Ctr. v. Blue Cross/

Blue Shield, PRRB No. 97–D82 (July 15, 1997); Barberton

Citizens Hosp. v. Blue Cross/Blue Shield, PRR Board No.

94–D61 (July 28, 1994); and St. Ann’s Hosp. v. Blue Cross/

Blue Shield, PRRB No. 93–D61 (July 21, 1993). These

decisions suggest that Northwest would need only to ‘‘engage’’ in the nursing education program in order to be

entitled to pass through treatment. Whether or not the

Secretary could have departed from these decisions had they

been his own (and we note the Secretary’s contention that he

could have so departed), Provider Reimbursement Manual,

Part I, § 2927 (‘‘Decisions by the Administrator,’’ which constitute the final decisions of the Secretary, ‘‘are not precedents for application to other cases.’’), all the decisions came

from the PRR Board level. There is no authority for the

proposition that a lower component of a government agency

may bind the decision making of the highest level. As we

held in Amor Family Broadcasting Group v. FCC, 918 F.2d

960 (D.C. Cir. 1991), ‘‘even if these cases were found to evince

internal inconsistency at a subordinate level, the [agency]

itself would not be acting inconsistently.’’ Id. at 962. All
12

that we or the regulated entity can properly ask of the agency

is that it explain its departure. This the Secretary has

expressly done. Northwest Med. Ctr. v. Blue Cross & Blue

Shield of Ark., Review of PRRB Dec. No. 99–D55, at 10 n.21

(HCFA 1999). We require no more of the Secretary.

Northwest’s last argument requiring discussion is that the

Secretary’s decision is not based upon substantial evidence in

the record as required by the APA. 5 U.S.C. § 706(2)(E)

(1996). The Secretary’s decision that Northwest did not

directly operate the program was based upon a close reading

of the contract governing the operation of the program. As

outlined above, the contract sets up BMSSN as an ‘‘independent contractor’’ with ‘‘full and complete ownership of the

school,’’ ‘‘full and complete charge of [its] administration,

management and operation,’’ and ‘‘the exclusive right to

determine and make all fiscal, technical and professional

policies relating thereto.’’ Agreement at 2. In addition, the

contract does not permit Northwest to ‘‘have [ ]or exercise

any control over the professional judgment or methods used

by BMSSN in the performance of services’’ under the agreement. Id. at 6. Northwest acknowledges that the contract

sets up BMSSN, not Northwest, as the operator of the

program. However, Northwest contends that in reality

Northwest contributes greatly to the operation of the program by paying for many of the costs associated with the

program, such as faculty salaries, and by providing facilities

for the program. Notwithstanding Northwest’s contributions, the contract between the parties clearly leaves Northwest with a role less than that of an operator of the program.

The contract itself constitutes substantial evidence for the

Secretary’s decision. Thus, we need not discuss the factors

relied upon by the PRR Board.

III

The Secretary’s interpretation of section 1395ww(a)(4) so as

to require ‘‘direct’’ operation of the program is a permissible

one. Furthermore, the Secretary’s application of that rule

here was supported by substantial evidence. The district
13

court erred in concluding otherwise. Accordingly, we reverse.

So ordered.